Is Passive Trading interesting at all?
Passive Trading is done by people who want to create an extra income. A passive trader is often interested in investing their money, but they do not want studying financial statements, markets, and even weather reports. This type of investor laughs at the good luck mantras and charms used by some investors. They are often happy to put their money in the hands of a broker and walk away.
The passive trader picks a stock, invests, and then patiently waits for a return in the future. A passive investor takes a look at the company’s value, assets, debt, and financial health. They consider market and competition when estimating the company’s opportunity for success. They are not aggressive, or looking for a quick gain.
As long as their losses are not in the high-risk level, they leave their portfolio alone. They follow the 10% rule when estimating acceptable loss. Once a stock falls 10% below what they paid, it is time to sell to the bargain hunters.
Investors may choose to invest on stocks that pay out high quarterly dividend or Passive Traders may put the money in the hands of fund managers. They have to pay them transaction costs.
Passive trading relies on the fact that over time the market has always gone up. If a trader is not passionately interested in the stock market and they’re investing mainly for retirement, a passive strategy may be the best bet.
Passive trading could deliver a decent return in the long run with a minimum of involvement. Two things are critical to this strategy:
- Choosing stocks that have good potential to increase steadily in value over the term of the investment.
- Selecting a diversified portfolio, to offset the unforeseen fate of one particular company or market sector.
To achieve this they can consider hedging by adding instruments such as bonds, which tend to go up in value when stocks are going down.
Read more: Active and Passive Traders
Disadvantage of Passive Trading
If you really want to benefit from stocks you need to have more than 10 stocks to profit from a rise in the stock price. But it is better to own 100 or 1000 stocks. It can be very expensive to own 1000 stocks. Say you are fond of Amazon. Amazon’s stock price is know $722.44 if you want to own 1000 stocks it will cost you $72.244. That is a lot of money. And you take a lot of risk. You need to diversify.
If your portfolio consist of one stock, you only have 50% change to make a profit. A good portfolio contains several stocks though. You may create a watchlist from notable stocks. If you have two stocks you have 25% chance and with 3 stocks 12.5% chance that your whole portfolio will increase. The more stocks you have the more difficult it is that they all are in profit.
The market is at an all-time high for some time now. What is the outlook? Market makers expects that the market will go down. And if that is the case, most of the stocks goes down. This might hit your portfolio hard too. That is not what you desire. So what can you do?
When trading stock you can make money when the stock price rises. Option Sellers can make money in every condition. When the market rises, falls. or even when it is flat. If you are selling options you can enter trades with a high probability of profit. You can enter trades with a 70 percent or more chance to make a profit.With options you can make bigger profits than with shares.
Options are cheap and you can control 100 stocks. It is easy to control 1000 stocks from one underlying and it is as easy to diversify your portfolio and control several underlying too. With a sudden move of the stock near at the money option prices will increase much.
If you sell options you will receive a option premium too. You can sell options with a strike price far of the stock price. Options are only valid for a certain days. When they expire worthless you may keep the credit. If you manage your trade early you will increase your number of winning trades. And with this your portfolio will grow steadily. You will be amazed how well your portfolio increases.
Even with options you can have a passive trading style. As soon as you have sold options and received the option premium you can enter an order to buy them back for a lower price. If the market accommodates you it may be pretty soon.